DSW (NYSE:DSW), the American footwear retailer, has widely underperformed the market over the last several months. However, a strong fourth-quarter report could help get DSW back on track. The results are due out on March 18, so let's take a look at the most recent release and the analyst expectations for the upcoming report to determine if this is our opportunity to buy DSW or if we should avoid this beaten-down stock.

Screen Shot

Source: DSW.

The last time out
On Nov. 26, DSW released third-quarter results for fiscal 2013. Here's a breakdown of the report and a year-over-year comparison:

Earnings Per Share $0.58 $0.58
Revenue $633.00 million $647.59 million

Earnings per share increased 14% and revenue increased 6.8% year over year, as comparable-store sales declined 0.7%. DSW also raised its full-year outlook, but this did not draw attention away from the disappointing revenue results, as analysts were expecting higher sales driven by back-to-school shopping and the start of the holiday season.

Dsw Interior

Source: DSW.

CEO Mike McDonald tried to keep the negativity contained, saying, "We were encouraged by the improvement in traffic and sales at the end of the quarter, as the fall selling season got off to a delayed start." This quarter ended on Nov. 2, so it appears that shoppers were waiting for holiday promotions to do their shopping.

Nonetheless, the market reacted negatively and sent DSW shares tumbling 4.81% on the day of the release; this initial decline quickly turned into a heated sell-off, and the stock now sits more than 18.5% below where it was before the release.

Expectations and what to watch for
Fourth-quarter results are due out before the market opens on March 18, and the current estimates expect negative growth; here's an overview:

MetricExpectedYear Ago
Earnings Per Share $0.29 $0.345
Revenue $574.00 million $594.3 million

These expectations call for earnings per share to decrease 15.9% and revenue to decrease 3.4% year over year; these are dismal estimates and would result in DSW's weakest quarter of the year, but they reflect the current challenges within the retail industry. Other than the key metrics, it will be important to watch for two things: the change in the gross margin and, most important, the company's outlook for fiscal 2014:

  1. The retail environment was highly promotional during the holiday season, and this is likely to greatly affect DSW's gross margin. In the year-ago quarter the gross margin came in at 28.9%, so keep an eye out for this statistic and make sure it does not drop too drastically.
  2. It will be crucial for DSW to provide an outlook on fiscal 2014 that is within analyst expectations; currently, the estimates call for earnings per share in the range of $1.93-$2.21 on revenue of $2.5 billion-$2.7 billion. 
About Dsw

Source: DSW.

Overall, the estimates seem quite low for the quarter, but I would still be cautious from an investment standpoint. The stock has been in a free fall to begin 2014 and we do not want to try to catch a falling knife.
With this said, if the earnings come in strong and the outlook on 2014 is within the expected range, a Foolish investor might want to consider initiating a position in DSW as long as the stock does not spike too high in response. 

What are the brands sold by DSW saying? 
Steve Madden (NASDAQ:SHOO) and Wolverine World Wide (NYSE:WWW) are two of the brand families sold at DSW locations; Steve Madden's brands include Madden Girl, Steve Madden, and Steven by Steve Madden, and Wolverine World Wide's brands include Keds, Merrell, Saucony, Sperry, and Wolverine. Both of these companies have recently reported their earnings, so let's take a look at what they accomplished, as this will give us insight into the condition of the footwear industry:

Steve Madden -- Feb. 25:

Earnings Per Share $0.54 $0.54
Revenue  $342.90 million $342.94 million

Source: Wikimedia.

Steve Madden's earnings per share increased 10.2% and revenue increased 8.7% year over year. Its company-owned retail stores reported that comparable-store sales were down 6.7%, but sales from the wholesale business grew 10.6% -- this is the segment that does business with retailers like DSW.

Steve Madden's CEO, Edward Rosenfeld, spotlighted these statistics, saying, "While we are cautious on the near term outlook for our retail segment due to continued softness in traffic and sales trends, we are confident that we can maintain solid momentum in our wholesale business, and we expect to deliver another year of strong performance in 2014." Basically, the company expects continued weakness in its own stores while growth occurs elsewhere, like at DSW.

Wolverine World Wide -- Feb. 18:

Earnings Per Share $0.22 $0.20
Revenue $740.80 million

$743.93 million

Logo Country Selector

Source: Wolverine World Wide.

Wolverine's adjusted earnings per share decreased 8.3% and revenue increased 13.6% year over year, driven by "excellent results" from three of its largest brands, Merrell, Keds, and Saucony -- all of these can be found at DSW's stores. The company added that the momentum in its brands has carried over into 2014 and it expects continued growth throughout the year, which is a positive sign for retailers like DSW.

In summary, the solid results and positive outlook from Steve Madden and Wolverine World Wide are positive indicators for DSW, but they still do not make a strong enough case to buy DSW right now.

The Foolish bottom line
DSW's stock has fallen more than 10% in 2014, but a strong fourth-quarter report could help turn things around. The current analyst estimates seem within reach for DSW, but you should still exercise caution when considering an investment today due to the negativity surrounding the retail industry. I believe Foolish investors should wait for the report to come out to get the most up-to-date financial information so we can make an educated decision on whether or not to put our money to work.

Investing is a marathon
Investors should wait to see what DSW's report holds before buying its shares, but if you're looking for some long-term investing ideas right now, you're invited to check out The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love for the long haul. 

Joseph Solitro has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers